Locking bias

25 Jul Locking bias

The battle over the 200-day moving average was lost this morning, as mortgage bonds fell to the pressure of the strongest stock market in US history. History shows that after a move beneath this critical level, bonds tend to fall sharply in the days immediately following the move. This is heavily due to triggered selling where investors choose a point at which their bond holdings are automatically sold off once a preset level has been crossed. This “trigger selling” momentum is causing money to flow out of mortgage bonds and into the stock market. From a technical picture, this is not welcomed news for mortgage interest rates, which are now climbing higher.

According to a Bloomberg survey of fund managers and strategists, the second longest bull market in US history will be over by the end of 2018. The median answer to when we will see the next recession was in the first half of 2019. There is little question that the stock market run has been driven by a liquidity-filled economic environment that is now on its final leg. By mid-2018, the Fed’s balance sheet reduction should be well underway. This will undoubtedly cause downward pressure in an irrationally exuberant stock market which has become so complacent that it virtually ignores the typical threats that should be driving prices lower already. Once investors feel the pressure of the Fed allowing assets to run off their books, we could see widespread panic selling of stocks that will further cause our economy to slow.

With bonds once again below their 200 DMA, the safe play will be to have a locking bias.